NEW YORK (CBS.MW) -- Cigarettes haven't only killed the Marlboro Man. They're also chipping away at the stock of the company he represented for 26 years. Still, analysts say Philip Morris' fortunes will rebound by year's end.

While the stock market continued to skyrocket this spring, Philip Morris (MO)
MO, -0.41%
hasn?t been so fortunate. The company?s stock has dipped into the mid 30s after a growth spurt in January had the stock trading in the high 40s. The stock is now trading near an all-time low.

To the angst of many long-time shareholders, the company?s balance sheet is uncharacteristically out of whack. The company?s stock, for one, is trading at about 12 times 1998 earnings.

Those look more like the numbers of a company's going-outo-of-business sale than the $72 billion consumer goods giant that?s been the darling of Wall Street for years.

"The bloom has really been off the rose for Philip Morris since last summer," explained Tom Rath, portfolio manager of the Safeco Income Fund.

Doom and gloom in this county

Shareholders revere Morris not just for its Marlboro cigarettes (often cited as the world?s second leading brand name product after Coca-Cola), but for its profitable food and beverage subsidiaries that include Miller Beer and Kraft Foods.

So why the gloom and doom in Marlboro Country?

Things just haven?t been the same for Morris, or the entire tobacco industry for that matter, after Big Tobacco agreed to pony up over $370 billion in a class-action lawsuit in June 1997. (Rival RJR Nabisco has since walked away from that deal).

But after President Clinton and former U.S. Surgeon General C. Everett Koop, among other national figures, went on record as saying any settlement was "great for the tobacco companies and bad for the country", Congress has spent the last six months dismantling the deal.

In the original version agreed to last June, the tobacco industry won some major concessions: nicotine wouldn?t be regulated, the industry would win immunity from future class actions and from punitive damages for past actions, Big Tobacco?s profitable global reach would continue unfettered, and the industry would continue to be virtually self-regulated as always.

New Jersey Sen. Frank Lautenberg summed up the feelings of the anti-tobacco forces by saying that "if the tobacco industry thinks that the U.S. Congress will rubber stamp this agreement, then what are they smoking?"

Tobacco bill teeters in balance

A new $516 billion bill sponsored by Sen. John McCain (R-Ariz.) is currently being bandied about in Washington. The legislation would make the tobacco industry pay billions in fees and taxes to fund anti-smoking programs and increase federal regulation of Big Tobacco (although it does place an $8 billion cap on annual tobacco industry payouts from any civil lawsuits that they might lose in exchange for the tobacco industry accepting a ban on advertising).

Even so, it?s passage is far from certain. With Democrats and Republicans both eager to either dilute or beef up the bill with endless amendments, Congressional leaders are reluctant to bring the bill to a vote.

"The tobacco bill is teetering in the balance whether or not it?s going to collapse," warned Senate Majority Leader Trent Lott (R-Miss.)

Until Congress resolves the tobacco bill one way or another, Wall Street observers say that the stock of top-tier industry leaders like Philip Morris will continue to wither on the vine.

"I think people were at first optimistic about a settlement in January but that sentiment has changed quite a bit. If anything, investors are anticipating a more onerous piece of legislation from Congress, and that?s not good news for Morris shareholders," said fund manager Rath at Safeco.

Fanning the flames

Others agree with that assessment. "The uncertainty created by the McCain proposals is vexing for Morris," commented Salomon Smith Barney tobacco analyst Martin Feldman. "Until Congress acts to resolve the issue, investors won?t feel comfortable with the stock and (the stock) will continue to tread water."

Some analysts say that staffers at the top-tier tobacco makers will likely play up the long-term prospects of the companies in what they hope will be a post-settlement, nicotine-friendly, litigation-free investment environment.

"Even if the tobacco companies concede some points during negotiations, companies like Philip Morris are still going to be great buying opportunities," added Rob Norfleet, tobacco industry analyst at Richmond, VA-based Davenport & Company. "Valuations for Philip Morris are still very solid; and it's one of the top companies in the world."

To fan the flames of its stock down the road, the tobacco industry has already indicated it will raise the price of cigarettes 50 cents per package to help defray the massive payout fees that Big Tobacco are liable for under the terms of any deal struck with Congress.

While that, plus a potential tax of $1.10-to-$1.50 that could be slapped on the legislation, will pour cold water on already besieged smokers, the $12 billion annually that such a price increase is projected to pour into industry coffers will help offset the big check it will cut each year to the states.

Philip Morris shareholders can only hope the stock has bottomed out. "I think that might be the case here," said Feldman. "By late in the third quarter I believe that Philip Morris will be back giving investors good, growing returns to shareholders."

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